At first, the idea behind Dave & Buster's (NASDAQ:PLAY) was novel. Offer one-of-a-kind games that the whole family can enjoy while serving up food. In fact, while many restaurants were losing traffic when the "restaurant slump" started years ago, Dave & Buster's was actually bucking the trend.

The company's luck, however, started running out two years ago. With the release of second-quarter earnings this week, it's clear the loss of traffic at existing stores is continuing.

Three young men sitting at a table and looking upset while drinking beer and cheering for a sport team

Image source: Getty Images

Dave & Buster's earnings: The raw numbers

Before we get into the details of what happened during the quarter, let's take a look at the company's headline numbers.

Metric Q2 2019 Q2 2018 Growth
Revenue $345 million $319 million 8%
EPS $0.90 $0.84 7%
Free cash flow $20 million $30 million (33%)

Data source: Dave & Buster's IR, SEC filings.

On the surface, this doesn't look so bad -- revenue and earnings increased at moderate levels. But all of the details need to be considered: The number of stores the company operates increased from 117 last year to 130 this year.

The real test of a restaurant's health are comparable-store sales -- or comps. By filtering out the effect of new store locations, we can get a better idea for how popular existing stores are. 

Chart of comps at Dave & Buster's

Chart by author. Data source: SEC filings.

As you can see, while it looked for a short time like Dave & Buster's might be righting the ship a few quarters back, things have once again trended in the wrong direction.

Specifically, walk-in sales were down 2% at comparable stores. Food and beverage comps were down 3.2%, and high-margin Amusement comps were also down 0.8%. 

What else happened during the quarter?

Speaking on the conference call, CEO Brian Jenkins pointed out there were many culprits for the shortfall:

Our comp sales results came in below expectations as last year's VR launched proved difficult to match and our promotions were not as effective as we had anticipated. We also face headwinds from adverse weather and the continued impact of competitive intrusion and cannibalization.

There were a number of other tidbits of note from the company's release:

  • The company launched its fourth proprietary VR game: Men in Black -- Galactic Getaway
  • The company still believes it will open 15 or 16 new locations during the fiscal year.
  • Management repurchased 3.4 million shares for a total of $137 million.

Looking ahead

Management was forced to revise its guidance for the rest of the fiscal year. Among those revisions:

Metric New Midpoint Guidance Old Midpoint Guidance Change
Revenue $1,349 million $1,378 million ($29 million)
Net income $96 million $108 million ($12 million)
Comps (2.75%) (0.5%) (2.25 percentage points)

Data source: Dave & Buster's. Midpoint guidance rounded to nearest whole number for revenue and net income.

Jenkins spent a good deal of the company's conference call talking about the five steps Dave & Buster's will take to right its ship:

  1. Revitalizing existing stores. Management spent a good deal of time talking about 50-foot LED WoW walls to improve customer experience.
  2. Deepen engagement with customers. The company is pinning its hopes on a new mobile app.
  3. Reducing costs. The company has identified $15 million in savings it can soon realize.
  4. Investment in highest-return new store locations. 
  5. Capital return to shareholders. To go along with share repurchases, the company plans on continuing its dividend.

If it can follow through on these priorities, that would be enormously encouraging for shareholders.